Rocco Scarsella is president and chief executive at RWS Financial Group LLC and also oversees an Office of Supervisory Jurisdiction for Cambridge Investment Research Inc.
When advisers reach a point when they are ready to sell their business, what are the first steps that should be taken?
You are looking at a figure for what you want to sell your business at, but you have to do an inventory of what you're trying to sell. Look at what part is an advisory or securities business and what your books are worth. A buyer wants to know where the assets are and where are the clients. From a seller's perspective, you want the highest dollar amount. So you have to look at the likely longevity of the business and its chance of succeeding. What is your revenue source? Recurring revenue has the highest value rather than transactional. A lot of advisers have a holistic business where they provide insurance, annuities and other services. Is there any liability built into the business? For example, if you carry nontraded REITs, with all the scrutiny surrounding them, is that a positive or negative for your business? Get an idea of what you have and be able to present your business in terms of the book of business. A lot of folks have a number in their mind of what their book is worth to them, and what they want for it. That can be problematic because if, say, $200,000 is what you want and (the buyer) says it's $100,000, you have to be somewhat realistic about it.
What are the challenges that advisers face once they start talking to potential buyers?
You have to think about the successor you want – what do you think that person should look like and be, so your clients stay? The last thing you want is to be dragged back into the business. I was talking to a wirehouse guy who sold his business and walked away, but after he was gone, he started getting calls from clients, saying the guy [who succeeded him] doesn't return calls, and is hard to get in touch with and all of these other problems. So he was dragged back into it.
You say that advisers have to be realistic about what their book is worth, but a lot of people tend to overestimate the value of their business because it's something they've worked years at building. How do you get past that?
It's hard. Something that's worth a dollar to a seller might be worth about 45 or 50 cents to the buyer. Then it's a stalemate, because [the seller] is just going to pout. If they can't get the value, they will just let [the firm] die slowly on the vine, until the revenue stops coming in. The more education they have about the size of the book the better off they will be. Get your staff involved in the business so everything isn't a mystery. The staff is quite a bit smarter than people tend to give them credit for being. Get them involved and build things for everybody's benefit.
What's important to think about when you are considering a successor in terms of looking in-house or finding an outside buyer?
You have to put the client first; if you don't have a client, then you don't have a business. Johnny may have been with you for a number of years and is loyal, but doesn't have the personality to bring in accounts, so the business could just plateau and not grow. Or Johnny may be a rainmaker but leaves because he's offended you didn't consider him as a successor. That's why you have to bring your staff in and work out a compensation plan so they benefit from the long-term health of the firm.
Besides valuing your firm and finding the right successor, what is another challenge that one faces when looking to sell a firm?
Financing is a challenge, whether you're doing an internal succession or whether it's an outside buyer. Banks aren't exactly lending to you because you want to buy a financial planning business. These things take a lot longer than people think. You may be 72 and you want to walk away now, but it can be a two- or three-year courtship before the adviser starts to reduce [his or her] exposure. A seller typically should be involved for some period of time because that increases the odds of the firm's retaining your clients. The longer the transition, the greater the value of the business.
